Economic Impact of UP Election

Introduction

    The scale of UP victory (>3/4th seat share) higher than any statistical analysis based on 2014 LS results: higher than both Surjit Bhalla's (@surjitbhalla) 60% seats and 5forty3's 2/3rd prediction. Political opposition/delaying tactics to Govt's economic policies likely to cease, both in RS and among party & affiliated organizations.  The Union Govt. will Re-Focus on economic objectives outlined in 2014 election manifesto and by the PM & his Govt. in the 2016-17 and earlier budgets. The mandate will allow the Union Govt. to accelerate Policy & institutional reform.

Policy Reforms

The Union government is likely to accelerate policy and institutional reforms that have already been announced by government, whether in the cabinet or in the budget. These include the following:

Welfare-subsidy reform

LPG reforms has made great progress. Govt has suggested at different times that other areas like kerosene, food, fertilizer, employment-NREGA would also be reformed  to eliminate corruption & admin inefficiency to reach benefits directly to poor, farmers & other needy groups.  So far these areas have been pursued very hesitantly and sporadically. Reforms are likely to be expedited so that the funds saved can be used to invest in infrastructure which promotes employment creating growth.

Strategic sales

  Strategic sales & public sector reform (PSUs, AI, ports, railway) reform to stop waste of resources into the sink hole, so funds can be used for infrastructure development. Strategic sale are opposed by vested interests (political, bureaucratic, management, labor) who enjoy the rents from Public sector while the public/tax payer pays the cost. The sweeping victory in UP will make it much easier to deal with obstructions and agitations from such vested interests, and thus accelerate the pace of change.

Labor Reform

  Labor law reforms were reiterated in the 2016-17 budget, in particular the reduction and integration of 44 odd labor laws into four functional ones. UP could also liberalize labor laws to encourage manufacturing, like Rajasthan & other BJP ruled States have started doing. 

Public Sector Bank (PSB)NPAs

        PSB bad loan problem, through decisions on sharing of losses by lender, borrower and tax payer/govt. NPAs whether at the country level or at the international level (e.g. Greece) is less about mechanisms, than about cost sharing than about appropriate sharing of costs between borrower, lender & tax payer.  Any decision will be criticized by opposition parties. However, with the Its hand strengthens by the electoral verdict, the govt is in a stronger position to deal with any criticism. The key here is too take & implement decisions quickly, rather than to search endlessly for a perfect solution (which does not exist) 

Goods & Services Tax (GST)

  The Union Govt. has an opportunity to remove some of the complications introduced at the urging of States, partly because govt did not have a majority in the Rajya Sabha.

Land Reform

   The Government can remove remaining constraints on land acquisition for infrastructure (e.g. through land pooling mechanism). It should also introduce the model land leasing law devised by NITI Ayog.

Foreign Direct Investment(FDI)

   The government has slowly and systematically eliminated unnecessary FDI restrictions and welcomed FDI. Given its announced intention to eliminate FIPB, there is now another opportunity to eliminate all FDI restrictions along with FIPB to encourage shift of manufacturing from newly-highly risky China to India.

Agriculture Productivity

    Allow the introduction of indigenously designed, tested and produced GM seeds followed by other GM seeds already evaluated, tested & cleared by the Indian regulatory agencies, which is so essential for enhancing agricultural productivity and incomes. Expedite removal of perishable goods from the APMC acts & the introduction  of e-markets.

UP administration

     There is also an opportunity to transform UP and consequently the Hindi heartland, by re-establishing rule of law, reducing corruption and accelerating economic growth.  One measure that would greatly facilitate transformation of the development paradigm, is the division of UP into 3 (or 4) separate administrative units, a halfway house to 3 (or 4) separate States. Each major sub-division (West UP, Central UP & East UP) would be under the charge of a deputy CM.  Bundelkhand admin could however be directly under the supervision of the CM. The CM would also act as a coordinator, planner, facilitator & supervisor of all major initiatives. He would also be the node between the union Govt/PMO and the DCM of the 3 quasi States.

Conclusion

      One of the results of the UP election results is likely to be a lengthening the time horizon of the policy options and institutional reforms considered by PM Modi led government from five to ten years. This implies less pressure to produce immediate results (populism) and greater likelihood of reforms that take time to work through the economy to produce visible results in growth and employment . However, the focus will remain on the reforms mentioned in the BJPs National election manifesto and the programs announced so far, with fine tuning based on the 21/2 years of running the union government.  The PMs words and actions over the past 2-3 years also suggests that he is likely to focus much more on establishing his place in history and to discourage some of his hyperactive followers from taking the law into their own hands or engage in violence and thus derail this long term objective.

Sustain India Growth At potential for Two decades

Introduction
The Economic Times of December 28, 2012, headlined that, "India can and should plan for double digit growth," stating that, " Only incoherent, populist politics and poor governance deriving from it hold down the growth rate."  The financial express of January 7, 2013 reported the PM as saying that "The only way forward for this country is to register a growth rate of 9-10%.” Every time the Indian Economy starts to recover, the talk of double digit growth is not far behind.  This detracts from and misleads politicians and government from the real challenge: Restoring the Indian economy to its growth potential of about 8.25% GDP growth and maintaining it there for at leas two decades till India becomes an upper middle income economy.

 The 12^th Plan, recently approved by the NDC, targets a growth rate of 8% for the twelfth plan period 2012-13 to 2016-17.  This was a reduction from the 8.2% average proposed earlier in the year and a sharp downward revision from the 9.5% proposed in the Approach paper to the 12^th plan.  With a likely growth rate of 5.5% in 2012-13 and an optimistic 6.5% in 2013-14 this would require and average growth of over 9% in the last three years of the plan.  Despite this, experts have criticized the Planning Commission for not targeting double-digit growth.  In an article, Claude Smadja a prominent observer of global growth concluded that , “..with some effective reformist actions.. India will bring the ‘Hindu growth rate’ to what should be 9 or 10 per cent a year.”

To my mind the most disturbing point in all this is not that the Planning Commission’s forecast of a year ago turned out to be so wrong - It is in the elite company of the Finance Ministry, EAC, World Bank, IMF and numerous international and domestic private forecasters.  The more important point is that too many influential people in India and abroad seem to believe that attaining an average growth rate of 9-10% over ten years is as easy as ticking of policy suggestions on a power point presentation.  The history of economic growth conclusively demonstrates the falsity of this assumption.  Having had the good fortune to study growth, one was in a position to oppose the adoption of unreasonably high growth targets (above 8.5%) in both the 10^th and 11^th plans and to delicately warn in 2008-9 (Economic Survey) that the key issue for India was not how to raise economic growth from the existing 8-8.5% to 9-10% (on which analysts, businessmen, government and media seemed to be virtually unanimous), but how to sustain 8 to 8.5% over the next two decades to become an upper middle income country.[i]

There have been scores of countries that have grown at very fast rates of GDP growth of over 8.5%% (GDP) for a few years but only a limited number that have sustained this average for a decade.  I call these “shooting stars” and ‘sprinters’ respectively. For the entire set of countries the correlation between average decadal growth rate in the 1990s and the 2000s is negative, having come down from a mildly positive 0.13 in earlier decades.  This means that in general growing fast in one decade does not guarantee a country equal success in the next decade.  Worst in the last two decades it has paradoxically proved to be a handicap. 

The transformation of an economy from low income to upper middle income takes many decades. Sustained fast growth is neither constitutional nor a human right or entitlement, that can be taken for granted once it has been bestowed or attained.  Just because India has grown at a per capita GDP growth of 6.1 per cent in the decade 2001 to 2011 and is one of eight countries to grow at 6% or higher during this period does not guarantee that it will continue to grow at this rate.  Like other fast growing economies, India has to constantly work at meeting the new challenges that arise from both outside and inside the country, in the form of disruptions and shocks, such as the global financial crisis and the oil price shocks.  Existing polices and institutions have to be constantly reevaluated as the trade-offs constantly change with faster growth and the faster the growth the greater the change.  Thus a nationalized coal industry that may have been able to cope with the growth rate of demand in the eighties is totally inadequate to the challenges of the fast growth of the 2000s: de-nationalization is now a greater imperative.   Some of these challenges are paradoxically the negative effect of faster growth.  To take a trivial example, in many parts of India, fast growth in real estate has depleted the standard, known sources of sand for construction.  Another more critical example is the depletion of underground aquifers and the pollution of surface and underground water sources.  Unless the policy and regulatory structures adapt and evolve to ensure that either new sources of these natural resource are found or there is enough incentive for innovation in developing substitutes, further growth will be hampered.  

 Institutional adaptation and reform also becomes essential as a country moves from the low income category to lower middle income category as we have in the last few years.  As institutions (administration, police, courts, legal system, social rules and norms) are slow to adapt and change, the faster the growth the greater the gap between the type of institutions that are needed and those that exist.  If un-addressed these can give rise to social discontent and conflict that can paralyze decision making and bring growth to a grinding halt.   Thus our institutions dealing with rural land, its conversion into urban land, the classification of land use and the development of urban public goods, are now quite inadequate to the needs of growth and in urgent need of reform.

                There have been less than a score of countries in history, which have grown for over a decade at an average per capita GDP growth rate of 7.1 per cent or more. The significance of this cut off (7.1%)  is that per capita income doubles in a decade and would become eightfold in three decades. There have also been about a dozen countries in history that have sustained a per capita growth of 6 to 7% for a decade.  India was in 2011 a member of this second category, but is in danger of falling out of it this year.  Talk of double-digit GDP growth (8,5% per capita) distracts from the challenge of maintaining per capita growth at 6% plus and the even more challenging one of bringing it back to the potential rate of  7% (about 8.25% GDP) and sustaining it at that level for the next two decades.

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[i] For analysis and papers see  website   https://sites.google.com/site/drarvindvirmani/

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A version of this article appeared under the banner, " The Double Digit Fallacy," on the Op-ed page of  the Indian Express of Monday 8th January, 2013, at  http://www.indianexpress.com/news/the-double-digit-fallacy/1055392/.